SEC Chairman Jay Clayton speaking at Temple University in Philadelphia, Wednesday, May 2, 2018. Photo credit: Dan Clark/ALM
On the heels of announcing the Securities and Exchange Commission’s “Best Interest Rule,” SEC Chairman Jay Clayton came to Temple University on Wednesday to discuss the finer points of the plan, which is meant to give retail investors a better understanding of who is investing their money and how they are doing it.
“Markets can be intimidating and complex and, if you’re not experienced or well informed, it is easy not to begin at all, or you may get burned by taking on more risk than you want. It is an investment professional’s job to bridge this knowledge, information, and comfort gap,” Clayton told the audience at Temple.
The SEC commissioners voted 4-1 on April 18 in favor of the proposed Best Interest Rule to further regulate financial advisers. The proposed rule has been pitched as an alternative to the Fiduciary Rule, which was implemented by the U.S. Department of Labor in 2016, but struck down by a federal court earlier this year.
Under the proposed Best Interest Rule, a broker-dealer would be required to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer. The SEC has said the rule would require clear disclosures and address conflicts-of-interest issues.
The goal is to make sure that a broker-dealer does not put its financial interests ahead of the interests of the customer. The proposed rule, which is now subject to a 90-day period of public comments, also restricts certain broker-dealers and their financial employees from calling themselves “advisers” when communicating with retail investors.
In his talk at Temple, Clayton, who has headed the commission since May 2017, said one of the issues retail investors face is confusion over whether it is an investment adviser (IA) or a broker-dealer (BD) who is handling investments. He explained that IAs charge an ongoing management fee that is a percentage of the assets being managed, while a broker-dealer charges a customer per transaction.
To solve this problem, he said, professionals handling an investor’s money must be clearer about their role.
“First, to improve investor understanding we are proposing a new disclosure mandate. BDs and IAs must disclose to investors the key aspects of their relationship in a form that is clear, short, and complete,” Clayton said.
He explained that some investors may have been fooled through “slick marketing campaigns” rather than honest discussions. Clayton also said that further transparency between investors and the financial professionals they are working with will eliminate “rotten fruit.”
“It will make it easier for us to identify and pursue the bad guys and, I hope, will make it easier for those who are behaving well to demonstrate that fact to us, other regulators, and, most importantly, their clients,” Clayton said.
He also addressed the importance of IAs and BDs disclosing to clients of any conflicts of interest they may have. As it stands now, he said, they are not required to give “conflict-free advice.”
“Many industry participants already make sure their clients understand these issues. However, the efforts of others fall far short. It is time for those others to come into line,” Clayton said.
The chairman also emphasized that he believed there are “too many cooks in the kitchen” and said he seeks harmonization among regulators.
One of those cooks, the DOL, instituted the Fiduciary Rule in 2016. But that rule was struck down by the U.S. Court of Appeals for the Fifth Circuit in March after a majority of the panel held that it “exploited an exemption provision into a comprehensive regulatory framework.”
During a question-and-answer session following the speech, Clayton told the crowd that the SEC did not adopt the DOL’s rule because it did not take “as tailored an approach” as the SEC’s rule does.